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VOL. 125 | NO. 132 | Friday, July 9, 2010

Controversy Remains Around City, Performa Settlement

By Bill Dries

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Memphis City Council members critical of the Beale Street court settlement say the Wharton administration was too generous after the city publicly alleged Performa Entertainment founder John Elkington owed the city millions of dollars.

But City Attorney Herman Morris said the administration’s priority was for the city to regain control of the entertainment district it owns as quickly as possible to begin fashioning a new agreement or plan for running the three-block district.

Morris was grilled for close to an hour this week with more questions from the council to come in two weeks.

In the process, Morris revealed new details about how the settlement was reached.

Still to come is a review of the settlement in U.S. Bankruptcy Court. Performa Entertainment filed for chapter 11 bankruptcy reorganization as the settlement was announced.

The case has been assigned to federal bankruptcy Judge Jennie D. Latta and is pending.

What Wharton and Performa CEO John Elkington signed last month was a “term sheet.”

Morris, in a July 6 letter to the council, said the document “is arguably an enforceable agreement by its terms and was intended to do so.”

The settlement doesn’t apply to the part of the lawsuit involving Beale Street Development Corp. (BSDC), the nonprofit the city leased Beale Street to and which in turn subleased the district’s management and development to Performa. That part of the lawsuit is still pending in Circuit Court.

Elkington wouldn’t budge on his legal bills and Beale Street merchants were a factor in the settlement – a controversial factor.

The merchants advanced $420,000 to pay Elkington’s legal bills. Rental credits the city agreed to pays them back for the advance at a rate of no more than $7,000 a month to be divided among all of the merchants for the next 60 months or five years.

Because the credits involve money earned by the tenants of Beale Street, the Wharton administration argued it’s not money that would have gone to the city’s general fund.

But critics on the council argued this week that without the credits the money would have flowed to the city even if it wound up in a downtown redevelopment fund to be used at the discretion of the mayor and not into the general fund.

Morris pointed out that the $7,000 a month compares to $13,350 a month that would have gone to Elkington and Performa through a 10.5 percent management fee on all income generated in the district had Performa remained in charge.

“The city effectively stops (Performa) from receiving this management fee,” Morris wrote. “This results in an increase of the revenue from the street.”

Elkington has said the leasing commissions he continues to get in the settlement were not a concession the city granted him as part of a bargain.

He contends and Morris agrees the commissions are a matter of state law because the 5 percent leasing commission is part of the subleases between Performa and the different businesses that are tenants in the district.

In his announcement, Wharton said the decision to settle was based in part on whether the city would be able to collect money if it won at trial.

Morris was more specific. The 1982 lease that set the terms for the rebirth of the entertainment district limited what the city could go after if Performa was found in default or breach of its sublease with BSDC.

The lease reads that the city would “look solely to the estate and property of the lessee in the improvements on the demised premises.”

Morris admitted that put a “significant limitation” on what the city could get.

“In hindsight this provision, though detrimental to the city, is what was agreed to in 1982 and a court would be bound by its terms and limitations today.”

The city and Elkington came to terms in marathon talks the day before the case was to go to trial.

Wharton said the timing put pressure on both sides.

Elkington maintains most of the pressure was on the city because his attorneys were prepared to attack the credibility of a very important witness for the city.

The report of Paul Pocalyko, of the accounting firm Parente Randolph, alleged Performa owed the city $6.4 million.

Elkington’s attorneys took apart the report and Elkington was vocal early on in saying it was flawed. His attorneys took the position that the city owed Elkington $1.4 million.

The city thought the Performa attack on the Parente Randolph findings might have been effective, especially since the court-appointed receiver for the district, John Ryder, also had problems with Pocalyko’s report.

Ryder told The Daily News in March the report had “a lot of problems … real credibility issues.”

Morris told the council Tuesday that twice in the 25-year history of the district and its management by Elkington, the city had agreed that it owed Performa money.

RECORD TOTALS DAY WEEK YEAR
PROPERTY SALES 0 133 1,342
MORTGAGES 0 131 1,047
FORECLOSURE NOTICES 20 39 190
BUILDING PERMITS 0 305 3,056
BANKRUPTCIES 17 135 753
BUSINESS LICENSES 0 53 329
UTILITY CONNECTIONS 0 0 0
MARRIAGE LICENSES 0 0 0